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Again the Fed Says CRE Valuations Are Inflated

March 5, 2018



Again the Fed Says CRE Valuations Are Inflated

The Federal Reserve has said on a number of occasions that asset valuations, including in the commercial real estate sector, are inflated. It did it again on Friday in its Monetary Policy report that it released to Congress. It wrote: Valuation pressures continue to be elevated across a range of asset classes, including equities and commercial real estate. Over the second half of 2017, valuation pressures edged up from already elevated levels. In general, valuations are higher than would be expected based solely on the current level of longer-term Treasury yields. This has been a theme that has appeared regularly in Fed speeches, reports and interviews. Shortly before she left, former Fed Chair Janet Yellen told CBS that US stocks and commercial real estate prices are elevated. Commercial real estate prices are currently “quite high relative to rents. Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high,” she said. The Monetary Policy report follows last week’s release of the Federal Reserve’s minutes from its January meeting. Language from the minutes suggested the Fed would not be adverse to raising rates more than the expected three times this year. When it does valuations will likely reconfigure. It is also important to note that the Fed has signaled that the rate increases — however many there are — will happen gradually, which likely means that any influence on valuations will be subtle. In the meantime there are many effects that an inflated valuation of real estate assets can have on the market and the immediate impact has been a disconnect between buyers and sellers on pricing — a disconnect that has been underway for some time. Essentially buyers and sellers are at loggerheads about pricing, Green Street Advisor analyst Joi Mar told in an earlier interview. “Investors are weighing record prices, slowing property fundamentals and Fed tightening,” she says. And of course, there are also structural changes underway in some asset classes such as retail, she adds. What will likely happen, she predicts, is that sellers will move toward the bid price. That is what usually happens — instead of the other way around — since buyers aren’t pressured to transact, while sellers may need to exit. Meanwhile, the Green Street Commercial Property Price Index remained essentially unchanged in January. The index, which measures values across five major property sectors, has declined by 1% over the past year. “Commercial property values have, for the most part, been steady, but performance depends on the type of property,” said Peter Rothemund, Senior Analyst at Green Street Advisors, in a prepared statement. “Industrial pricing continues to set new highs, while strip retail values have recently moved lower. Other property types are little changed of late.” (



Survey: Expected Interest Rate Increases This Year Remain Top Concern Among CRE Execs

Rising interest rates remain the top concern for commercial real estate executives this year, with 80% of respondents in a sentiment survey by law firm Seyfarth Shaw expecting multiple rate increases amid clear expectations that the anticipated increases would begin to weigh on commercial property markets in 2018. For the second straight year, an overwhelming 98% of executives surveyed by the Chicago-based firm predicted at least one increase this year, with 37% projecting three rate hikes by the Federal Reserve over the next 12 months, up from just 14% a year ago. "As the real estate industry embraces the new Trump tax cuts, low unemployment and stock market success, industry insiders expect today’s economic factors to force the hand of the new Federal Reserve chair and, consequently, shape their 2018 investment strategies," Seyfarth Shaw attorneys Christa Dommers and Ronald Gart said in revealing this year's top concerns of property executives in the third annual Real Estate Market Sentiment Survey. "Respondents clearly believe that multiple interest rate increases will start to have a material adverse impact on the commercial real estate market," Gart and Dommers said. Federal Reserve Chairman Jerome Powell, in his first extensive public comments since taking over for Janet Yellen earlier this month, told a Congressional committee today that the economy is stronger than the beginning of the year, and the central bank plans to raise rates gradually. "My personal outlook for the economy has strengthened since December," Powell told the House Financial Services Committee under questioning Tuesday about whether the Federal Open Market Committee might boost its number of projected increases from three to four next month when the FOMC formally updates its outlook. "After easing substantially during 2017, financial conditions in the United States have reversed some of that easing," Powell told the committee. "At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation. Indeed, the economic outlook remains strong." Analysts attributed part of Tuesday's nearly 300-point decline in the Dow Jones Industrial Average to Powell's optimistic comments. About 63% of the 157 executives surveyed by Seyfarth Shaw believe the U.S. CRE industry can absorb an interest rate increase of between 0.5% and 1.5%. About 15% believe real estate markets can only handle an increase of up to half a percentage point, roughly equal to the number of respondents who said the industry could withstand from roughly 1.5% to 2% in increases. The U.S. federal funds rate now stands at 1.5%. Three more hikes would take it to 2.25%. Concerns about the "end of the current growth cycle" entered the Seyfarth Shaw sentiment charts with a bullet this year, ranking number 3 on the list of the greatest concerns for the commercial property sector in 2018, behind rising interest rates and challenging supply and demand fundamentals. Concerns over the effect of banking regulations and the wall of maturing CMBS loans on the industry fell from the previous year's survey to seventh and ninth, respectively. The Seyfarth Shaw survey results mirrors rising concerns in Real Estate Roundtable's First Quarter 2018 Sentiment Index, which revealed a noticeable decline in the score of 57 for current conditions to 51 for future conditions. Respondents are feeling comfortable about the stability of the real estate market in 2018, but many expressed concerns about what the market may look like next year, Roundtable said, citing respondent comments such as "heading into 2019, it gets foggier." “People are cautiously optimistic but reserved," one respondent said. "How long can the cycle run? We think the window of visibility is a lot shorter than it was. People seem to feel good about this year, but beyond that, I can't say they know how to feel.” “It's stable, but you can see signs of slowing," said another executive. "Transaction volume is down and groups are being careful." The Trump tax turbocharge should prime the pump for continued growth, Seyfarth Shaw survey takers agreed, with 58% believing the new Tax Cuts and Jobs Act signed into law by President Donald Trump late last year will extend the current expansion by at least one to two more years. Private equity and institutional investors are the top primary sources of equity for respondents in 2018, with more third-party investment expected this year than in 2017. Respondents viewed private equity, which jumped from number 3 to number 1 this year, as the preferred source due to its new tax benefits and current positive economic conditions. Nearly three-quarter of survey respondents (73%) reported that infrastructure would not be a part of their investment strategy. Some 96% of respondents, meanwhile, report they have no plans to use cryptocurrency such as Bitcoin in their deals due it its perceived volatility, lack of understanding and lack of regulation. Further, about 43% believe the rise of ride-sharing services such as Uber and Lyft will affect their analyses of acquisition and development of commercial property, with reduced parking ratios and proximity to public transportation causing investors to re-evaluate their properties and plans. (CoStar)



Highly Anticipated Zeppelin Station Opens March 12

On Monday, March 12, Zeppelin Station — the creative workplace and market hall located at the 38th and Blake Station of the RTD commuter rail line in Denver’s RiNo neighborhood — will open its doors to the general public. The final culinary tenant at Zeppelin Station will be called “No Vacancy,” featuring a rotating lineup of local, national and international restaurant talent that will occupy the front-and-center space, each for a 60 – 90 day stint. The first guest to stay in No Vacancy will be Comal, the beloved, heritage food incubator in partnership with non-profit Focus Points Family Resource Center, where female entrepreneurs from the Globeville and Elyria-Swansea districts cook and serve the Mexican, El Salvadorian, Syrian, and Ethiopian foods that they grew up eating, while honing their culinary and business skills. Zeppelin Station will be the second, albeit temporary, outpost of Comal which calls the Taxi Development its permanent home. Dedicated to serving best-of food and drink offerings prepared by respected chefs and local artisans, the eight stalls and two bars at Zeppelin Station will be open daily serving morning coffee and breakfast-on-the-go, mid-day lunch, afternoon pick-me-ups, happy hour, dinner, cocktails and late night eats. A full-service anchor restaurant, separate from the food stalls, will be revealed in the summer of 2018. The market hall will be the new home of the RiNo Arts District and the organization’s affiliated retail shop, showcasing not-found-elsewhere pieces created by local artists.“When we originally envisioned Zeppelin Station, we imagined a day and night destination where you’d find the most sought-after food and drinks in the city,” said Justin Anderson, director of hospitality development for Zeppelin Development. “Over the past year, we’ve assembled a lineup of highly-regarded, independent operators who will showcase their very best dishes in an environment that encourages diners to personally experience the dishes being prepared through smell, sight and sound.” Designed by award-winning Dynia Architects, Zeppelin Station is on track for LEED certification and features indoor-outdoor open spaces, high ceilings, natural light and native plantings in the exterior landscapes. Above the market hall, three floors of office suites offer roll-up garage doors that provide access onto green roof terraces overlooking the Denver skyline and Rocky Mountains. Companies that will reside at Zeppelin Station include Beatport, Brandfolder and Love Your Hood, among others. “Denverites are seeking similar amenities in their workplace that they have at home: well-designed spaces, ready access to fresh air, great views and natural light in a location that’s easily accessible by foot, bike and transit. Having a one-of-a-kind food hall experience on the ground floor is the ultimate amenity,” said Kyle Zeppelin, president of Zeppelin Development. (Mile High CRE)



Demand Is Strong in Denver's Industrial Market

With Denver’s population growth and e-commerce continuing to expand, industrial development is expected to continue and rents will continue to be pushed up. Of the 5.4M SF of new industrial space delivered last year, 2.9M SF was speculative space, CBRE First Vice President of Industrial and Logistic Services Todd Witty said. By the time the speculative space was delivered, 1.9M SF of it had been pre-leased. The region’s vacancy rate for industrial space stood at 5.8% in the fourth quarter. Witty said he expects 4M SF of new industrial space will be delivered this year, with 66% of that being speculative. Much of the demand is being driven by rapid population growth — metro Denver is expected to add another 40,000 people this year — and an e-commerce industry that is expected to top $500B in sales in the United States by 2020. CBRE First Vice President of Industrial and Logistic Services Todd Witty, pictured with his wife, Monica, and their four children, said population growth and e-commerce are driving demand in Denver's industrial market. “Because of those things, we’re seeing new development remain robust,” Witty said. “More retailers are seeking to be closer to their customer base.” The region’s most sought-after submarket is near Denver International Airport, where 1.3M SF is under construction, according to CBRE’s Denver Industrial report for the fourth quarter. Regionwide, there is nearly 4M SF of industrial space under construction. Population growth and expansion of e-commerce are not only driving development, but also driving up industrial rents. Between 2016 and 2017, the average asking rent increased 6.9% to $7.67/SF per year triple net. “Rising construction costs and continued demand will continue to push rents into 2018,” Witty said. (Bisnow)